Due Diligence Before Buying a Franchise

If you are considering the idea of buying a franchise take caution.  Before you finalise your decision on which franchise to buy or how much to invest, you must consider a few points and ask some vital questions about the business and the franchisor.  Another way of making sure that you’re making the right decision is to find an experienced franchise consultant,  who can guide you through every step of the process.
 
Here are a few things that you must consider before you invest in a franchise.

 

Evaluating 4Ps of the franchise
 
The first thing to do when you consider a particular type of franchise is to evaluate its competitive dynamics, by assessing each of the 4Ps of marketing.
 

Product consider the product or service that the franchise offers to its customers and check the details of its design, copyright, purpose and customer response in the market.

Price check if the product is appropriately priced and it can generate the expected ROI.

Place see whether the locations where the product is marketed and presented are appropriate for its proposition.

Promotion check if the product is being promoted in a way that customers understand and can identify with

 
Evaluating the franchisor
 
After you have gathered details of the franchise, that the help of your franchise consultant to investigate critical details about the franchisor his reputation and a detailed history about his business, including the successes and failures. This information will play a major role in determining the returns you can expect to get.  Also, you can inquire about the franchisor from trade associations and can learn more about his :

 

Reputation

Track record and relationship with existing franchisees

Financial stability and strength

Management strategies

Disclosure policies as per the laws of the land

 
Evaluating the franchise system
 
A franchise model is successful when its franchisees also succeed with the system.  A well-established franchise has to be a strong business model, which has set rules and procedures of its own by which a potential franchisee can evaluate his choice.  Here, take the help of your franchise consultant to evaluate the franchisor’s  management strategies, which perhaps are employed to monitor and control the functioning of each franchisee. You should also check how the other franchisees have performed over the years, and how many have successfully achieved their financial goals.
 
Evaluating the Investment
 
The next important thing to ponder and consider is to think through your investment and other financial liabilities to the franchisor fees, royalty, minimum purchase quota etc.  If you want to achieve the financial goals that you have set for yourself, you should be aware of the potential profitability of the business and when the franchise can achieve its break-even.  If possible, look for a franchise business or a franchisor that provides financial support and services from banks; it will greatly ease your burden of initial investment.
 
Reviewing the franchise agreement
 
The most important of all, ask your franchise consultant or a lawyer to review the terms and conditions of the franchise agreement before you actually ink the deal. Make sure that the franchisor’s verbal assurances are also included in the agreement and check if the agreement covers all necessary points on exclusivity, sales, setting up and training, arbitration, and termination of the franchise.
Also ensure that the franchise is free of all financial liabilities before you buy it, so that you can reach you financial goals as targeted.

 

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